Energy Risk Management

Energy Trading and Investing: Trading, Risk Management and Structuring Deals in the Energy Market [Hardcover]

ByDavis Edwards, McGraw-Hill Professional 2010.

A book review by Nicholas Newman http://www.oxfordprospect.co.uk/Freelance-Journalist.html

This book by Davis Edwards should really be called Energy Trading and Investing in North America, since it is heavily focused on the United States. Even so, it is a useful book for those seeking an introduction to this complex subject. It is written not to frighten off the aspiring trainee market analyst, energy lawyer or energy journalist. Energy Trading and Investing is written in plain jargon free English and without the use of complex mathematics one usually associates with such books.

The books author is MD of Australia’s Macquarie Group, and has been responsible for many years for managing the credit risks of its North American investments. It is designed for those readers who need a clear basic understanding of the principles of energy trading and investment.

This book is divided into several sections. In the first, it provides an overview of the energy markets, detailing the main elements, players and structures. For instance explaining the reasons why power station operators will switch on or off their power plant in response to changes in market prices. This section provided a useful explanation about how traders can buy cheap surplus electricity in the Pacific Northwest and export it to energy hungry consumers in southern California at a higher price.

In the second section, there is an in-depth descriptions of all the major energy commodities such as coal, including an explanation about the merits of different types of coal together with its operating constraints, costs and pollution implications. It is clear despite this book being published in 2010, many of its assumptions appear dated and focused on the United States. Since the author is very pessimistic about increases in new oil output and oil refinery capacity. although construction in new oil refinery capacity has remained static in the United States, elsewhere in the world including the Middle East, South Asia and Far East the been a building boom in new refineries. In addition, energy companies all over the world are launching new rigs able to explore and produce oil and gas from more distant from the shore in deeper water like off Shell's new Perdido Spar which is 200 miles off the Texas coast.

However, the third section provides a financially orientated discussion about how chemistry, physics, accounting, and option trading affect current and future pricing. The explanation about statistics I found interesting as it explained how traders use statistics to understand trends in the market.

In the fourth section, there are primers on load forecasting, tolling agreements, natural gas storage. It was interesting to understand how the market price for power can change due to seasonal and hourly variations in temperature. For example, when a jump in temperatures, causes a jump in demand for electricity to power air-conditioning, which results in market prices for electricity to jump, resulting in more power stations, offering to sell power at higher prices.

In the last section, the book provides a clear practical introduction to risk management. For the first time I found a clear explanation of what such traders like Nick Leeson who brought down Barrings Bank were up to in his market dealings.

Overall, a useful training manual and guidebook, for those who need to quickly understand and comprehend the complexities of Energy Trading and Investing.

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To buyEnergy Trading and Investing: Trading, Risk Management and Structuring Deals in the Energy Market